BoJ – No change was announced last night: The monetary base target was kept at ¥60-70trn/year, with the pace of purchase also unanimously maintained for each asset class. The outcome was in line with expectations and offers no surprise.

BoJ Gaining Confidence Via Takeshi Yamaguchi of Morgan Stanley MUFG Securities

An interim review of the April Outlook Report took place at the July MPM. Based on an assessment that both real GDP growth and CPI will “likely be broadly in line with the April forecasts,” no meaningful revisions were made. The board members’ median outlook for Japan style core CPI (excl. consumption hike impact) was generally maintained at +0.6% for F3/14 (Apr. outlook +0.7%), +1.3% for F3/15 (+1.4%), with the F3/16 outlook also intact at +1.9%, still pointing to average growth of nearly 2% for the Japan style core CPI.

BOJ Outlook For Economy

With regard to its assessment of the economy, the BoJ revised up, from “picking up” to “starting to recover moderately”, for the seventh strength month. The media is focusing on the reappearance of the word “recovery” for the first time since Jan, 2011. However, note that the BoJ’s statement of economic assessment significantly lags actual economic trends, and thus the wording per se has little significance. A more meaningful piece of information, in our view, is marginal changes (of upward revision).

BOJ  Shifted To Bullish Statement

Meanwhile, a noteworthy point is that the BoJ has shifted to a slightly more bullish statement of “pick-up in overseas economies” from “growth rates of overseas economies gradually pick up, albeit moderately” previously, potentially suggesting that the Bank is starting to take a more bullish view of the overseas economy (In this regard, however, the BoJ explained in a post-MPM briefing for economists that the change in wording does not suggest any change in the BoJ’s assessment of overseas economy).

Further easing in the short term less likely for now: The possibility of additional easing in the near term is falling, assuming no external factor-driven adversities or an accumulation of considerable downside risks for prices and the economy.

We do believe the 2% inflation target can be met during the 5-year term of Governor Kuroda. However, in the short run, we note downside risks such as slowing EM economies, possible worsening in sentiment on the back of a temporary decline in expected real wages with higher inflation expectations, as well as the consumption tax hike next FY coupled with the decline in public spending; attainment of the 2% target in the next two or so years is a very high hurdle, in our view.

We see a lingering possibility that the BoJ will be forced into further easing accompanied by a downward revision to its outlook as actual price trends start to deviate significantly from its price outlook, going ahead.